Obama Intensifies Tax Fight

President Barack Obama proposed a one-year extension of Bush-era tax cuts for families earning less than $250,000 a year but would let them rise for wealthier Americans, a move that both shifts the election debate to tax rates and sets the table for a showdown with Republicans in Congress.

Mr. Obama's move didn't break new policy ground—he essentially repackaged his existing policy for the campaign season. Nor is it likely to pave the way for action from a deeply divided Congress already in the thrall of the campaign.

But by highlighting his desire for higher taxes on upper-income Americans to deal with the deficit, and prompting Republicans to reiterate their sharply different vision for lower rates for all, Mr. Obama's move had the immediate effect of showing a clear partisan contrast that had been obscured by the campaign focus on jobs.

It is a debate that will be resolved only by voters—and perhaps by both parties' stated intention to move beyond the argument about rates to a new discussion about fundamental tax overhaul after the election.

Republican nominee-in-waiting Mitt Romney has proposed lowering rates for all taxpayers as a way to spur the economy and increase jobs. He wants to keep the Bush-era rates in place for everyone for starters, and then would reduce those rates by another 20%. Some deductions would be trimmed to offset the cost under Mr. Romney's plan, but he hasn't specified which of them he would curb or eliminate.

Pitching his position as a proposal for action by Congress in an election year, Mr. Obama moved to frame the tax debate as one of fairness, calling for the wealthiest Americans to do their "fair share" to pay down the deficit and help the nation invest for the future.

Mr. Romney responded in a radio interview: "To add a higher tax on job creators and on small business is about the worst thing I can imagine to do if you want to create jobs."

The White House said his plan would bring in $65 billion in additional government revenue next year from higher taxes paid by the top 2% of tax filers.

Under the Obama plan, the top marginal tax rates would rise to 36% and 39.6%—up from the current 33% and 35%—on that portion of adjusted gross income above the $250,000 threshold for families and $200,000 for individuals.

The nonpartisan Tax Policy Center estimates that roughly 1.25 million tax filers are in the brackets that would be affected.

Mr. Obama's plan to extend the lower rates for families earning less than $250,000 isn't expected to win the 60 votes needed to pass in the Democratic-controlled Senate. And while Republicans are likely to win passage in the House of a temporary extension of lower rates for everyone, the measure is expected to then die in the Senate.

Democrats, including Sen. Charles Schumer of New York and House Minority Leader Nancy Pelosi of California, earlier had said the tax cuts should be extended for a larger group of the families—those earning up to $1 million a year. But aides to both lawmakers said Monday they support the Obama plan, and Mr. Schumer no longer plans to push for a vote on the higher threshold.

Ultimately, the question of who should pay more and who should pay less in taxes will come to a head at year's end, when the Bush-era tax cuts are set to expire for all Americans.

A resolution isn't expected until after the election, when voters will have chosen between Mr. Obama and Mr. Romney and their starkly different tax plans.

Still, Mr. Obama insisted that the core of what he was proposing—ensuring that taxes don't rise for most Americans next year—was something both parties clearly agree on.

"Let's not hold the vast majority of all Americans and our entire economy hostage while we debate the merits of another tax cut for the wealthy," Mr. Obama said from the White House.

While the tax debate shows a stark divide between the two presidential contenders and their parties, it also obscures a potential area of quieter agreement between the sides. Both parties have said they would like to see a comprehensive overhaul of the tax code, a matter that could be on the congressional agenda for 2013.

If the tax debate takes that course, the argument over rates could take a back seat to a broader discussion of the shape of the tax code, the overall amount of revenue it brings to Washington and the claim both parties make that they would, in general, like a system of lower rates and fewer deductions and loopholes.

For now, the two presidential campaigns are fleshing out details of different ways of coping with a system that both sides agree needs to be addressed before the end of the year.

Mr. Obama would set new 30% minimum rate for families earning more than $1 million—in addition to calling for higher rates on families earning more than $250,000.

He also would lower the top corporate tax rate to 28% from 35% and eliminate or limit a number of tax breaks.

In addition to proposing lowering all individual income-tax rates and cutting or reducing deductions, Mr. Romney has called for reducing the top corporate income-tax rate to 25%, eliminating the estate tax and eliminating capital-gains taxes for families making less than $200,000.

The tax question can't be avoided this year because Mr. Obama and congressional Republicans agreed in December 2010 to extend the Bush-era tax cuts through 2012 for all taxpayers, citing the need to avoid disrupting the struggling economic recovery and the need to seek a bipartisan agreement over how to proceed for the long run.

But Mr. Obama said at the time that he wouldn't extend all the tax rates again, and on Monday his spokesman, Jay Carney, promised the president would veto legislation being pushed in the House that extends the lower rates for everyone again.

For Republicans, the tax debate offered a fresh opportunity to argue that Mr. Obama's tax rates would hurt the economy and, especially, small businesses.

"In the wake of another weak jobs report, the president is doubling down on his quixotic call for the same small businesses tax hikes that have been routinely rejected by the House and Senate," House Speaker John Boehner said in a statement.

Republicans said the Obama proposal would raise taxes on some 940,000 people who report business income on their taxes, a broad definition of small business.

The White House argues that even under this definition, 97% of those filers earn less than $250,000 and would not be affected. And White House officials say many of the people who are affected are upper-income earners such as attorneys or hedge-fund managers.